Commercial banks facing liquidity tightness

kathmandu,May 7 – Although the banking system usually sees higher liquidity during the last quarter of the fiscal year, commercial banks are facing liquidity tightness in recent days.
Generally, banks reduce lending, while deposit collection grows due to increased government spending in the last quarter of the fiscal year. But the government’s failure to expedite spending this year has resulted in liquidity tightness, according to bankers.
As of mid-April, Rs 57 billion has been stuck in the government’s treasury, which is Rs 16 billion higher than that as of mid-March, according to the Nepal Rastra Bank (NRB).
The banking system is facing tighter liquidity situation this fiscal after a year’s gap. After an acute liquidity crunch in 2010-11, banks enjoyed excess liquidity in 2011-12.
Besides government’s failure to spend, other factors responsible for the liquidity tightens are tax payment by banks and financial institutions and other taxpayers who withdraw deposits from BFIs and increased bank lending compared to deposit growth.
According to the NRB, bank lending grew by 16, percent while deposit growth remained at 6 percent as of mid-April. Total deposit collection of banks reached Rs 927 billion, while lending stood at Rs 723 billion. “Aggressive lending compared to deposits also brought the tightness in liquidity,” said an NRB official.
The tightening liquidity situation has also forced BFIs to increase interest rates on deposits, particularly on fixed deposits. According to bankers and depositors, interest rate on fixed deposits has crossed 10 percent.
The tightness in liquidity is also evident with the fact that the inter-bank lending rate reached as high as 7 percent last week, but has come down below 6 percent this week. An NRB official said about half dozen banks’ credit-to-deposit ratio is above 80 percent in recent days, which also reflects the tightness in liquidity.
Banks have particularly increased interest rates for institutional fixed depositors. According to Rishi Ram Gautam, executive director of Citizen Investment Trust (CIT), one of the big institutional depositors, the CIT has been receiving three percent higher interest rate now compared to three months ago. “We received interest rate as high as 10.6 percent — up from 7.5 percent three months ago,” he said.
Bankers said they were forced to increase the interest rate on deposits in the wake of slow deposit growth and the government’s failure to spend despite huge revenue collection.
“We have increased the interest rate on fixed deposit to 9 percent,” said Sashin Joshi, chief executive officer of NIC Bank. “As the government delayed releasing the budget for completed work, it resulted in liquidity tightness.”
NMB Bank has increased interest on fixed deposit to 8.5 percent from earlier 7 percent. NMB Bank CEO Upendra Poudel said the current tightness in liquidity is momentary and a majority of banks have increased the interest rate on deposits on short-term deposits.
Laxmi Bank is also planning to increase its interest rate for individual fixed depositors.  “We are increasing the interest rate for retail fixed depositors to 9 percent. We have offered as much as 9.5 percent to institutional depositors,” said Laxmi CEO Suman Joshi.
He said it is necessary to bring individual depositors to the banking system as they were diverted to the share market and other sectors after the interest rate decreased. “With individual depositors moving away from banks, institutional depositors have been assertive to claim higher interest rates,” he said.
Given the banks’ boards seeking higher returns at the end of the fiscal, banks have increased lending aggressively while deposit growth has remained sluggish.

KATHMANDU POST